Saudi banks see weak asset quality but firm profitability metrics: Fitch Ratings

Profitability metrics for banks in Saudi Arabia improved in 2018 despite continued pressure on asset quality from a challenging operating environment, with little new business and subsequent low loan growth, according to Fitch Ratings.

The firm expects loan growth likely to be at most mid-single digits for 2019 in the Kingdom.

“Asset-quality metrics will remain under pressure, particularly in contracting and retail/wholesale trade, until the effects of higher government spending are visible on the private sector,” Fitch said.

“We expect some continued loan restructuring,” it added.

Fitch also noted that operating profit/risk-weighted assets improved in 2018 due to stronger net interest margins (NIM), lower LICs and better cost efficiency.

“The average NIM rose to 3.5 percent in 2018 from 3.3 percent in 2017 (a continued trend over the last four years) as the banks' ability to reprice loan books has more than offset increasing cost of funds due to rising rates,” it said.

Funding pressures continued to ease in 2018, owing to greater liquidity in the system with higher oil prices, a rise in deposit growth, low loan growth and new large issuance by the government and related entities, according to Fitch.